New CPO price forecast US$610/US$611 per MT in CY19/CY20. We foresee higher CPO price in 2019 on:- 1) Stronger demand from CPO restocking by major importing countries amid current low price levels – countries such as India need imported CPO to fulfill its domestic edible oil demand; 2) brief dip in global supply from declines in Indonesian output after a bumper 2018 crop; and 3) better biodiesel economics due to its price differential with the higher crude oil price. We expect CPO price to recover to US$610 per MT in 2019 before reaching US$611 per MT in 2020. In the medium to longer term, we expect price trajectory to remain positive as there is limited room for supply expansion for palm oil on ageing trees and absence of new planting in the past five years since Indonesia scrapped approvals for new planting.
Successful implementation of Indonesia’s biodiesel mandate is potential catalyst. The difference between CPO and crude oil price is attractive at this point, as reflected in the reignition of Indonesia’s 20% bio content (B20) mandate in September. We believe that if this programme is fully and successfully implemented, it could result in up to 7-8m MT of CPO demand for biodiesel blending (compared to our base case annual biodiesel volume of 4m MT), and potentially driving CPO price to approach US$650 per MT. This bull-case scenario would imply global CPO demand that is 7% higher than our CY19 base case of 69.9m MT.
Defensive play, stay afloat amid low price. Amid pressures on CPO price, CPO planters’ profitability and cash flow remain solid thanks to their low cost structure and yield performance. We still prefer a defensive play on strong yield to keep cost per tonne minimal, while still providing sound earnings growth potential. Our picks are Astra Agro Lestari (AALI), London Sumatra (LSIP), Bumitama Agri (BAL), First Resources (FR), Wilmar International (WIL) and TSH Resources (TSH).